Pound Sterling Q1 Fundamental Forecast: GBP Rudderless On Brexit Permutations

The United Kingdom (UK) is scheduled to leave the European Union (EU) on March 29, 2019; and as we stand, the Brexit Withdrawal Agreement that is currently on offer from the EU to the UK will not pass through a vote in the House of Commons. If there is no agreement between the two sides – or if an extension of the Article 50 timetable has not been agreed – the UK will leave the EU with no-deal and will revert to World Trade Organization (WTO) trade rules. If an agreement is reached, a transition period until December 2020 will be triggered where the UK can negotiate its own deals. This makes the first quarter of 2019 one of the most important three-month periods in the UK’s history. That in turns will translate into any and all action, news release or rumor having an outsized effect on Sterling.

As we write, Prime Minister May lost control of the Brexit negotiations and her government, and there is no sign of any deal that will be accepted by either side. And, that is hitting Sterling hard, forcing the currency ever lower. In addition, it is possible that May could lose her job before the Brexit end date via a Labour-led vote of no confidence, a general election may be called, a second referendum may be put to the people of the UK, the EU may offer meaningful concessions, or the UK will leave with no deal. All these options are on the table and live and need to be priced-in to Sterling as we enter the first quarter of 2019.


UK growth has slowed as we enter the New Year with the final fourth quarter annual rate likely to fall back to 1.4% from a prior quarter 1.6%. Manufacturing and output production are both lowly and sentiment readings weak. The UK jobs market however remains robust with an employment rate of 75.7% matching the highest estimate since comparable figures began in 1971. UK average monthly wage growth has picked-up on the back of a tightening labor market with the latest reading (3.3%) the fastest rate of growth in a decade. While the Bank of England (BoE) will keep interest rates unchanged until the final Brexit outcome is known, if faster wage growth feeds through to core inflation, Governor Carney will have to juggle a difficult combination of lower growth and higher prices when he looks to normalize monetary policy in late 2019 or early 2020.

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